1. Chapter 9: The Housing Expenditure

2. Objectives
Discuss the options available for rented and owned housing and whether renters or owners pay more for housing.
Determine how much buyers can afford for housing.
Discuss the various mechanisms for financing a home.

3. Objectives
Identify the numerous costs of buying a home, including principle, interest, and closing costs.
List and describe the steps in the home-buying process.
Identify some important concerns in the process of selling a home.

4. Young Couple, No Children Couple, Children No Longer At Home
Housing Decision
Young Single
Rental housing has limited maintenance and offers mobility.
Purchase a home or a condominium for financial and tax benefits.
Single Parent
Rental housing can provide suitable environment for children and some degree of housing security.
Purchase low-maintenance housing to meet financial and social needs of family.
Young Couple, No Children
Rental housing offers convenience and flexibility of lifestyle.
Purchase housing for financial benefits and to build long-term financial security.
Couple, Children No Longer At Home
Rental housing for convenience, flexibility for changing needs and financial situation.
Purchase housing that requires minimal maintenance and meets lifestyle needs.
Couple, Young Children
Rental housing can provide facilities for children in a family-oriented area.
Purchase a home to meet financial and other family needs.
Retired Person
Rental housing meet financial, social, and physical needs.
Purchase housing that requires minimal maintenance, offers convenience, and provides needed services.

5. Renting Your Residence
Advantages
Mobility
Fewer responsibilities
Lower costs initially
More amenities
Disadvantages
Few financial benefits
Restricted lifestyle
Cost of renting - deposits
Legal concerns of a lease

6. Advantages of Owning Pride of ownership American dream/norm
Reduced income taxes
deduct property taxes
deduct mortgage interest

7. Advantages of Owning Build an equity pay down the loan
(continued)
Build an equity
pay down the loan
price appreciation
Builds your credit rating
Hedge against inflation
Lifestyle flexibility
can express your individuality

8. Disadvantages of Owning
Financial risk
need down payment
home prices could drop
Limited mobility
can take time to sell
Higher living costs
maintenance
repairs & improvements
utilities & insurance
real estate taxes

9. Renting vs. Owning Your Home
WHO PAYS MORE:
Based on cash flow, renters appear to win
After taxes and appreciation, owners usually win

10. Renting versus Buying Place of Residence
RENTAL COSTS
EXAMPLE
YOUR FIGURES
Annual Rent Payments
$15,000
Renter’s Insurance
210
Interest Lost on Security Deposit (amount of security deposit times after-tax savings account rate) 36
Total annual cost of renting
$15,246
Annual mortgage payments
$15,168
Property taxes (annual)
4,800
Homeowner’s insurance (annual)
600
Estimated maintenance and repairs (1%)
2,000
After-tax interest lost on down payment and closing costs
750
Less financial benefits of home ownership
Growth of equity
(1,120)
Tax savings for mortgage interest (annual mortgage interest times tax rate)
(3,048)
Tax savings for property taxes (annual property taxes times tax rate)
(1,344)
Estimated annual appreciation (1.5%)
(3,000)
Total annual cost of buying
$14,806
Comparing an apartment with $1,250 of monthly rent and a home that cost $200,000. A 28% tax rate is assumed.

11. Housing Options for Home Buyers
Single-family dwelling
tract housing
built on speculation by builder
built to your specifications
previously lived in home
manufactured home
mobile home

12. Home Buying Process Step 4: Obtaining Financing
Determine the amount of down payment
mortgage insurance
Qualifying for a mortgage
can be pre-qualified based on income, assets, debts, credit history and length of loan
purpose of “points” (prepaid interest)
The home loan application process
fixed or adjustable rate mortgage
locking in an interest rate - search Web

13. Qualifying for a Mortgage
Amount available for down payment
Amount of income
Amount of other debts
Credit rating
Current mortgage rates
Length of loan desired

14. Home Buying Process Step 1: Determine Ownership Needs
How much you can afford
down payment
loan amount
size and quality
handyman’s special
sweat equity

15. Home Buying Process Step 2: Finding and Evaluating a Property to Purchase
Select a location
Zoning laws
Covenants, codes and restrictions
Using a real estate agent
Property appraisal
Conducting a home inspection
9-15

16. Home Buying Process Step 3: Pricing the Property
Determining the price to offer
Negotiating the purchase price
seller’s or buyer’s market
earnest money
Contingency clauses
home passes structural inspection
able to get a loan

17. Estimating Mortgage Loan Payments for Principal and Interest
(Monthly Payment per $1,000 Borrowed)
Payment Period (Years)
Interest
Rate (5) 15 20 25 30
4.5
$7.6499
$6.3265
$5.5583
$5.0669
5.0
7.9079
6.5996
5.8459
5.3682
5.5
8.1708
6.8789
6.1409
5.6779
6.0
8.4386
7.1643
6.4430
5.9955
6.5
8.7111
7.4557
6.7521
6.3207
7.0
8.9883
7.7530
7.0678
6.6530
7.5
9.2701
8.0559
7.3899
6.9921
8.0
9.5565
8.3644
7.7182
7.3376
8.5
9.8474
8.6782
8.0523
7.6891
9.0
8.9973
8.3920
8.0462
9.5
9.3213
8.7370
8.4085
10.0
9.6502
9.0870
8.7757
Note: To use this table to calculate a monthly mortgage payment, divide the amount borrowed by 1,000 and multiply by the appropriate figure in the table where the interest rate and the time period for the loan intersect. For example, a $150,000 loan for 30 years at 9 percent would require a payment of $1, [($ /1,000) x ]; over 15 years it would require a payment of $1,

18. Effect of Down Payment Down Payment Amount Of Loan Monthly $5,000
Effect of Down Payment Size on Monthly Payment for a $150,000 Home
(7 Percent Mortgage Loan for 30 Years)
Down
Payment
Amount
Of Loan
Monthly
$5,000
$145,000
$964.69
10,000
140,000
931.42
15,000
135,000
898.16
20,000
130,000
864.89
25,000
125,000
831.63

19. Type of Mortgages Conventional fixed rate, amortized
5, 10 or 20 percent down
15, 20 or 30 years of fixed payments
Government guaranteed
Veterans Administration
Federal Housing Administration
Adjustable rate mortgages
varies with the prime rate but has a rate cap

20. Type of Mortgages Graduated payment payments start lower and go up
(continued)
Graduated payment
payments start lower and go up
for persons whose income will increase
Balloon
fixed monthly payments plus one large payment, usually after 3, 5 or 7 years
Growing equity
payment increases to allow loan to be paid off more quickly

21. Type of Mortgages Shared appreciation
(continued)
Shared appreciation
borrower agrees to share appreciated value of the home with the lender
Home equity loans
a second mortgage
home is collateral and interest may be tax deductible
Reverse
a loan based on the home equity
Refinancing

22. Home Buying Process Step 5:
Closing the Purchase Transaction
Title insurance and search fee
Attorney’s and appraisers fees
Property survey
Recording fees; transfer taxes
Credit report
Termite inspection
Lender’s origination fee
Tax and insurance reserves
Pre-paid interest
Real estate commission
Closing Costs

23. The Main Elements of Buying a Home
Location
Down payment
Mortgage application
Points
Closing costs
TIPI (taxes, insurance, principal, interest)
Maintenance costs

24. Selling Your Home Preparing your home Determining the asking price
Appraiser
Realtor
For sale by owner or use a broker
Listing with a real estate agent

25. Make Sure Security Deposit Is Returned
1. List damages/defects before moving in unit.
2. Maintain unit and promptly notify landlord of any problems.
3. Give proper written notice of intent to move.
4. List all damages/defects after moving out of unit.
5. Use certified mail to request return of security deposit.
6. Use small claims court, if necessary.

26. Types of Real Estate Agents
Listing agent
Selling agent
Buyer’s agent
Dual agent